The Co-op’s banking arm revealed a setback to its recovery today after admitting it needs to raise another £400m to cover past issues.

The business, which is set to report full-year losses of up to £1.3bn for 2013, said the matters relate to conduct and legal documentation, such as legacy PPI business and technical breaches of the Consumer Credit Act.

The Co-op Bank is now under the control of bondholders as part of last year’s refinancing to fill a £1.5bn hole in its balance sheet.

Today’s update means the starting capital position of the bank for its four- to five-year recovery is weaker than in the rescue plan announced last year, requiring shareholders to inject another 00 million into the business.

Chief executive Niall Booker said: “The proposed capital raise would enable us to reset this starting point and continue with the execution of our original business plan.”

The bank said continuing “root and branch” reviews of processes, procedures and documentation had produced further conduct and legal issues.

In addition, one-off costs associated with the separation of the bank from the Co-operative Group have proved more costly, time-consuming and more complex than anticipated.

Its capital ratio - a measure of its financial strength - is now expected to be around 7.2 per cent, compared with previous guidance of near 9 per cent and against the regulatory minimum requirement of 7 per cent. The bank’s results for 2013 are expected to be announced on or before April 8.

The bank said it was focused on improving its capital position and on community banking through retail and small business (SME) customers.

Mr Booker added: “The new executive team brought in just nine months ago is continuing to review aspects of the Co-operative Bank’s legacy operations, assets and liabilities.

“As a result of this continuing review, we are unearthing a range of issues which the new executive team is having to address.”

The risks were identified at the time of the rescue process last year but the Co-op said it was now quantifying the financial impact of some of those risks.

Mr Booker said there were some early indications of progress in its turnaround plan.

He added: “We have started to simplify the business, reduce costs and de-risk assets as we drive the change needed to return to our roots as a bank focused on our retail and SME customers. However, there remain significant challenges ahead.”

Staff numbers have been reduced by 1,000 in the last year, equivalent to 14 per cent of its workforce, as part of a planned 15 per cent cut in its branch estate.